The Debtor Nation

September 19, 1985

THE COMMERCE Department took official notice this week of a symbolic event in this country's economic life. Some time a few months ago, it has now been confirmed, U.S. public and private investments abroad no longer exceeded the value of foreign holdings of this country's public and private assets. In that sense the U.S. became a debtor nation.

Joining the ranks of the world's Micawbers has no immediate consequence for people in this country. There is no debtor's prison for nations. The change in status should not cause this country to hold its head less high in the councils of nations even if, as is widely expected, the United States displaces Brazil as the world's largest debtor. Nor is it in any way likely that foreign investors will suddenly liquidate their U.S. holdings, leaving this country scrambling to pay off its foreign debts.

The significance of the debt measure is that it takes broad account of this country's economic position vis-a-vis the rest of the world. As the president suggested in his Tuesday press conference, the merchandise trade deficit, the focal point of recent concern, doesn't tell the whole story. The United States could afford to go on importing far more goods -- shoes, dresses, tape recorders, automobiles and so on -- than it is able to export as long as that merchandise imbalance was offset by surpluses in service exports or returns from U.S. investments abroad. The trouble, which the president didn't acknowledge, is that the huge merchandise deficits the country has been running have overwhelmed surpluses in the service accounts. As a result, the country has been amassing foreign debt. The cost of paying interest and other returns to the foreign holders of that debt further aggravates the current balance-of-payments problem, since the United States can no longer depend on net returns from its foreign investments to help offset trade deficits. And in the long term, that means this country may have to sacrifice some of its own standard of living to finance its foreign obligations.

As the president observed, the United States grew and prospered as a debtor nation during the 19th century. In those years it imported huge amounts of foreign capital and labor to exploit its enormous resource base -- an investment that paid off handsomely both here and abroad. The difference now is that capital formation in this country has not, at least so far, been commensurate with the inflow of foreign capital. Instead much of our recent foreign borrowing has gone to finance private consumption through tax cuts, and public consumption through government spending. In a very real sense, the country is borrowing from its future.